Bond of Indemnity Overview

The bond of indemnity definition is an obligation in writing in which a party has agreed to reimburse the holder of the bond for an injury or loss due to a specific event or has agreed to protect a party from injury or loss related to a specific event. The bond acts as a kind of insurance policy against the failure of a party to perform in a manner that was agreed upon. If a failure to meet the terms of the bond occurs, then the party protected by the bond will be indemnified through it. When a party is indemnified through a bond, it means they have been restored to the state they were in before the failure to meet the terms of the bond took place.

Surety Bond Indemnity

One common type of indemnity bond is a surety bond indemnity. A surety bond indemnity is a three-way agreement between the principal (the party needing the bond), the obligee (the party protected by the bond), and the surety, or underwriter (the party providing the bond­–usually a licensed bonding company). It acts as a contract guaranteeing that the principal will fulfill their obligation to the obligee. If not, then the surety will indemnify the obligee on the principal’s behalf, then turn to the principal for reimbursement for the indemnification.

Surety companies differ from insurance companies insofar as their business model does not include taking a loss in their business dealings. If a principal fails to meet the bond’s agreement, they will give the principal the opportunity to resolve this with the obligee, but if this does not occur and the surety has to step in, they will expect satisfaction from the principal. For instance, a $50,000 payment will require $50,000 in return from the principal, and if they do not get it, a lawsuit is likely to arise.

Although some surety companies only require a signature of the potential indemnitor, because of the potential for large amounts of money to be changing hands, many bond companies will ask that more stringent requirements be met before they enter into a bond agreement with a principal. These requirements could include meeting certain financial standards, having a solid business reputation, and passing a background check.

Bond companies may also require principals of the indemnifying company to act as indemnitors, as well, such as the CEO, president, and majority shareholder (in the case of corporations). Sometimes even spouses of those signing an indemnity agreement are required to sign them too. Those signing a bond will be liable for it if the principal fails to pay it, so they should take great consideration before doing so.

The surety bond agreement will always be made in writing, but since surety bonds are not legally required for private projects, their requirements will vary. For example, some surety bonds require a Social Security Number be listed, while others will require an unrelated third party to act as a witness to every signature and sign that they acted accordingly. Additionally, the protections provided by such bonds can vary from bond company to bond company, so it is best to carefully review a bond agreement with legal counsel before signing it.

Completing and Indemnity Agreement

In order to complete an indemnity agreement, there are two key steps that must be taken. First, the appropriate signatures must be gathered:

  • If a corporate indemnitor signature is required, this should be gotten from an authorized company officer, such as the corporation’s president.
  • If a limited liability company (LLC) indemnitor signature is required, this should be gotten from an authorized manager or member of the LLC.
  • If a partnership indemnitor signature is required, a signature from an authorized partner of the partnership will be necessary. Usually this is the general partner.
  • If a sole proprietor indemnitor signature is required, the owner of the sole proprietorship will have to provide it.
  • If an individual indemnitor signature is required, this should come from the individual indemnitor.

Once the proper signature is collected, the singed indemnity agreement should be returned to the surety company. Most surety companies require this to be done within two weeks of the bond’s purchase

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